Manufacturers: Are you Prepared for New EU Taxonomy Sustainability Reporting Requirements?

Mark Rushton

The European Green Deal provides policy measures designed to make Europe the first climate-neutral continent by 2050. To spur businesses to meet these greenhouse gas emissions goals, the European Union (EU) is requiring corporations to provide new levels of transparency through mandated sustainability reporting.

This includes a classification system for businesses to disclose which of their activities/operations – or the economic activities they invest in – are “environmentally sustainable.” The EU also requires organizations to report their progress toward meeting EU sustainability objectives to address climate change. (The United Kingdom’s Green Finance Strategy is developing a similar sustainable finance model.)

Successful manufacturers are using the EU Taxonomy and other sustainability reporting and disclosure tools to prioritize efforts to reduce the carbon footprint throughout their supply chain, outline sustainability plans, and highlight their green manufacturing achievements.

What is the EU Taxonomy?

The EU Taxonomy is supporting this transition to a carbon-neutral economy by providing transparency regarding economic (business) activities that most contribute to meeting the EU’s environmental objectives.

EU Taxonomy serves as a green classification system – and a corporate sustainability scorecard – that investors and potential customers can use to see a business’s progress toward meeting the EU’s climate goals. Importantly, the EU Taxonomy regulation provides the first common framework to compare environmental, social, and governance (ESG) data across multiple companies. By classifying environmentally sustainable actions, the EU Taxonomy is designed to improve sustainable investment, create security for investors, and motivate companies to be more sustainable.

Manufacturers, for example, that are showing measurable reductions in their environmental impact may attract ESG-focused investors. Alternatively, companies that aren’t reducing their carbon footprint could face scrutiny from customers, investors, and other market influencers.

The Taxonomy is part of a suite of EU regulations to mandate corporate sustainability reporting on financial and operational activities. Specifically, the EU Taxonomy is aligned with the current Sustainable Finance Disclosure Regulation (SFDR), which focuses on financial reporting. The Taxonomy also supports the Corporate Sustainability Reporting Directive (CSRD), which will replace the SFDR in 2024.

What are the CSRD’s Sustainability Reporting Requirements?

The CSRD is the European Commission’s first common reporting framework focused on non-financial ESG data. This CSRD reporting requires companies to disclose how sustainability issues affect their organizations (“impacts inward”) and the overall environment (“impacts outward”).

Compared to the SFDR, the CSRD more than quadruples the number of companies required to report on sustainability. Nearly 50,000 companies must submit their report aligning with the CSRD. The expected compliance timeline depends on whether companies already fall into the scope of the NFRD. If they do, they are expected to publish reports in 2025 on the financial year 2024. If companies do not, CSRD compliance is delayed by one year (2025). The forthcoming CSRD reporting requirements apply to:

  1. Large companies (listed and non-listed) as defined in the Accounting Directive (i.e., a company with at least two of the following criteria:  250 or more employees; minimum of €40 million turnover in the EU; a balance sheet of at least €20 million)
  2. All companies in EU-regulated markets
  3. Non-European companies with a net turnover of €150 million and one or more subsidiaries or branches in this region

How Manufacturers can Meet ‘Environmentally Sustainable’ Objectives

A “substantial contribution” to climate change mitigation signals that a company’s sustainability performance levels align with European Green Deal climate neutrality goals. And that a manufacturer’s ESG actions play a role in limiting global warming to a 1.5 degrees Celsius increase.

To meet the EU’s “environmentally sustainable” definition, a company’s economic activity must comply with minimum social safeguards. And it must also show how its actions are contributing substantially to at least one of the EU’s six environmental objectives while not harming any other objectives:

  1. Climate change mitigation
  2. Transition to a circular economy
  3. Climate change adaptation
  4. Sustainable use and protection of water and marine resources
  5. Pollution prevention and control
  6. Protection of healthy ecosystems

Advancing Corporate Sustainability for the EU Taxonomy and Beyond

Many manufacturers are well-positioned to contribute substantially to advancing the following two environmental objectives:  climate change mitigation and the transition to a circular economy, which is a model to increase recycling, eliminate waste and use natural resources safely.

Product design and manufacturing are the linchpins of successful sustainability efforts. Companies determine more than 80% of a product’s environmental impact and cost during the design phase.

How do you Measure Manufacturing Sustainability and Emissions?

Steps that manufacturers are taking to measure and manage their sustainability efforts include:

Establish a Carbon Emissions Baseline

Because you can’t manage what you can’t measure, manufacturers are adopting the Greenhouse Gas Protocol method to track their carbon emissions throughout the supply chain. The company provides three levels/scopes of CO₂ measurement for manufacturers.

Scope 1 addresses direct emissions from owned or controlled sources, and Scope 2 includes indirect emissions from purchased energy generated, along with the emissions tracked in Scope 1. And Scope 3 – the Corporate Value Chain Standard – includes all upstream and downstream emissions along with emissions tracked in Scope 1 and 2.

Manufacturers typically use product life cycle assessment (LCA) software to collect sustainability information once a design is complete. But this manual process is cumbersome, and sustainability information isn’t integrated into other systems.

Evaluate Cost vs. Sustainability vs. Manufacturability Tradeoffs

Once there is a baseline for a product’s current carbon footprint, manufacturers can work to reduce COemissions and meet their other product requirements simultaneously. Teams can analyze tradeoffs among cost, sustainability, and design for manufacturing (DFM), and make decisions accordingly.

Product brands are using aPriori’s Manufacturing Insights Platform to:

  • Identify alternative materials to reduce CO2 emissions, weight, etc.
  • Evaluate CO₂ alongside cost to improve sustainability without hurting profitability
  • Select alternative manufacturing processes to save electricity, reduce scrap, etc.
  • Update product designs (3D CAD) to cut manufacturing times, incorporate alternative materials, etc.
  • Establish a comprehensive and customizable environment for granular, traceable, and transparent calculations

Keys to Sustainable Product Development

Companies are using digital transformation (DX) capabilities to incorporate sustainability insights into their strategic planning and manufacturing operations. With a unified view of the product development and manufacturing process, businesses can understand a product’s CO2 impact during early design phases, and then evaluate opportunities to reduce a product’s carbon footprint. Product design and production teams can simulate design alternatives using different materials and manufacturing processes to meet CO2 emissions, cost, and performance targets.

Manufacturers with the insights to evaluate cost, sustainability, and manufacturability are well-positioned to capitalize on the market demand for “green” products at an attractive price point. Companies can use the EU Taxonomy to differentiate themselves as sustainable manufacturers – and clearly communicate this advantage to customers, investors, and other constituents.

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